Thursday, June 14, 2012

1st Circuit Examines Scienter requirements

The 1st Circuit reviewed the question of scienter in a case arising from statements that a parent company, Textron, made about the financial condition of its subsidiary, Cessna Aircraft. Textron made public statements assuring its investors of the strength and depth of the backlog of orders and  Cessna’s unusually low cancellations" during 2008. Senior management stated that the level of cancellations at that time “are not even noteworthy". Three months later,Textron reported substantial cuts to Cessna's production levels due to few orders, a high number of cancellations, and "an unprecedented number of deferrals" of delivery dates by customers.

The court initially examined the district court’s finding that the alleged misstatements were not material, and observed that summary judgment, rather than a 12(b)(6) motion, would likely be a more appropriate instance “to decide whether such details are of marginal interest or so important that Textron's statements were misleading without them."

However, the court found that it did not need to reach the materiality issue because it concluded that the plaintiffs’ scienter pleadings failed. According to the court, “nothing in the complaint suggests that any of the named officers believed, or was recklessly unaware, that the backlog's significance had been undermined by weakened underwriting standards, sales to intermediates, or any of the other flaws on which the plaintiffs rely." In addition, the questionable materiality of the practices, depending importantly on matters of degree and detail, “deprives any inference of scienter of forward momentum that would be helpful to plaintiffs.” Warnings by subordinates or expressions of concern by executives were also notably absent, observed the court.

The court recognized that the officers may have been overly optimistic or extravagant in their descriptions, but "negligence or puffing are not enough for scienter.

Automotive Industries Pension Trust Fund v. Textron Inc.

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